Thoughts on Borrowing Money to Invest

If you read my recent post, you will know that my wife and I have been talking about investing a lot more lately. Part of that conversation has involved the topic of borrowing money to invest in various business ideas.

I’ve never really been all that interested in the idea of borrowing money to invest, however, it has occurred to me lately that if we want to speed things along, one of the fastest ways to do that is to borrow money, particularly when it comes to capital intensive endeavors like physical product sales.

One thing that we have to our advantage is that we recently sold our house, which has left us with a nice cash buffer to use for whatever we need. That saves us from having to borrow, however, if I am serious about reaching my goals in the time frame I have set, then at some point it is highly likely that I will have to borrow money in the future.

Borrowing money to invest isn’t a new concept. I remember when I first started investing in stocks, I had a work colleague that regularly used margin loans to invest. I never really warmed to the idea, particularly because so many people got caught out with margin loans during the GFC. The whole thing seemed a little too risky for me at the time.

If I do decide that I need to borrow money to speed things up, I’ll have to make sure I understand the ins and outs regarding the rules of the loan. I wouldn’t want to get caught out needing to pay back money in a hurry like the margin loans. Instead I would be looking for a standard business loan, which I understand to be a lot more like a mortgage loan.

One other way of getting a quick injection of funds that I have been thinking about is by setting up a kick starter campaign. I have seen a couple of them recently where people have essentially just asked for money to kick off their businesses. I never really understood why people would give money to things like that, but they do, so it’s certainly worth considering.

Question

What would you do to get some quick capital to speed up business development?

It is important to get independent financial advice when you are investing, especially when you are a beginner. For me, I would definitely review carefully what would be my investment are before deciding to borrow some money.Clarisse @ Savvy Scot recently posted..Visiting Quito, Ecuador

Outside of borrowing money and something like a kickstarter campaign, which you mention, it seems to me the only other option is to sell current assets.SavvyJames recently posted..Living Frugally: Use Coupons and Save

Are you planning to start your own business? My husband, when he launched his home business 6 years ago, took out a line of credit. It was not an ideal situation, and we have just recently paid off the last of it. But it was “quick capital”.Prudence Debtfree recently posted..Abstainers and Moderators in Personal Finance

Speaking as someone who has experienced several margin calls, I would never recommend that anyone borrow to invest in stocks. As for borrowing to invest in a business or start a business, it depends where you are borrowing from, but in any case, try to avoid borrowing at all. Borrowing from friends and family is OK if they understand that it may take years to pay off. Borrowing using a second mortgage or equity line is OK, if you don’t mind losing your home. Borrowing with credit cards to purchase equipment and supplies is OK, but for cash advances is prohibitively expensive.

If crowdfunding is an option for the product or service that you are offering, then I strongly recommend using Kickstarter or IndieGoGo. You can raise money fairly quickly and never have to pay it back. (You just have to eventually provide your product or service to many of the backers.)

I know of one young man who developed a simple product, filmed a video of himself using the product with just his iPhone, posted it on Kickstarter with a goal of $150,000, but ended up raising $450,000, in just 30 days.Fred recently posted..5 Ways to Protect Yourself in a Bear Market

Professional investors borrow money all the time to make investments. The difference is that they use LLCs Corporations to make the investment so they are not personally liable. A good example is real estate development where the asset itself is used as collatoral for the loan. I would never use margin to purchase a volatile asset such as stocks/bonds.Paul @ The Frugal Toad recently posted..10 Essential Questions To Ask At Every Interview

At once, I did that. I borrowed a huge amount of money from a bank. My plan was half, I will use to pay for debt and half I will use for investment. But before I did, I computed everything and made sure I won’t be at a loss. After my computation, it turned out that I spent 75% for investment and 25% for paying my debt. I did not pay everything. The money I get from my investment, that’s the one supporting me in paying my debt. After payment of debt, at least I know I still have the 75%.

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